Why South Korea Is Banning All Foreigners From Trading Cryptocurrency

A man enters the Bithumb exchange office in Seoul, South Korea, on Friday, Dec. 15, 2017. South Korea will restrictively allow cryptocurrency trading on only qualified exchanges and review a possible capital gains tax on crypto trading as a way to restrain the nation's frenzied speculation. Photographer: SeongJoon Cho/Bloomberg

South Korea’s financial regulators set the pace for sweeping cryptocurrency regulations to curb speculative overheating and illegal activity on Tuesday, including banning foreigners and minors from opening new cryptocurrency accounts.

Financial Services Commission vice chairman Kim Yong-beom announced measures to ban anonymous trading on domestic exchanges, while foreigners and minors would be completely banned from trading through cryptocurrency accounts. Both measures go into effect Jan. 30.

They are the first concrete measures to be implemented since the government
began observing overheating in the market
in September. The system aims to tackle money laundering and related crimes, along with speculation-driven overheating in the market, Kang Young-soo, head of the FSC’s cryptocurrency response team, said by phone on Tuesday after the announcement.

“The government is concerned about manipulation of market conditions and injection of illegal funds while market funds are leaked into speculative investments,” he added. “We view that foreigners’ and minors’ investments contribute to our areas of concern.”

All foreigners, including residents, nonresidents and “kyopo” ethnic Koreans with foreign citizenship, will be banned from trading cryptocurrencies in Korea, the FSC’s foreign media department said by email. Minors are banned after Prime Minister Lee Nak-yeon earlier claimed the cryptocurrency craze could
lead the youth toward crime.

The government first suggested last month to ban minors and nonresident foreigners. But the final decision nets all foreigners regardless of resident status. “If they’re not Korean citizens, then they can invest in exchanges provided in their countries. Why do they have to invest in ours?” Kang quipped.

The government has been under mounting pressure to deliver on impending regulations over the country’s cryptocurrency market, one of the world’s largest for Bitcoin, Ethereum and Ripple, as the uncertainties have thrown global prices into turmoil. Cryptocurrency trade has gone largely unregulated as South Korea neither recognizes digital coins as financial products or currency. On Tuesday, FSC vice chairman Kim reiterated that the government does not guarantee the value of cryptocurrency, stressing that investors trade at their own risk.

But for the past few months, financial authorities and prosecutors have been mulling comprehensive regulations on anti-money laundering, tax evasion, fraud and other illegal activity, including a
proposed ban on all initial coin offerings.

Justice Minister Park Sang-ki on Jan. 11 threw fuel on the speculative market when he claimed all crypto exchanges would be shut down. The government later clarified that it was one option being considered, along with only shutting down exchanges that were acting illegally. Since then, citizens have railed against the government with over 220,000 signing a petition to demand a response from the presidential Blue House.

“The government is creating boundaries for instances of foreigners injecting in coins into the country and a phenomenon of more Bitcoins and other cryptocurrency circulating within the Korean market,” says Kim Jin-hwa, corepresentative of the Korea Blockchain Association, which has about 30 member companies including several exchanges. “With the current conditions of our market, higher supply would equate to higher speculation.”

The targets of the latest regulation, says blockchain startup BlockchainOS Choi Yong-kwan, are Chinese investors who have flooded the cryptocurrency market since their country
banned cryptocurrency trade
last year. Digital coins from China enter Korean exchanges, then are illegally changed into foreign currencies, which are sent back to China, he explained.

“These cases are surprisingly high, and difficult to track or identify. This measure can be viewed as a response to ban these illegal activities,” he said by phone, but suggested the ban would have little effect on existing investors. “The biggest problem lies on Chinese cryptocurrency investors, so this matter is an important focus.”

Under the new rules, foreigners who have already have cryptocurrency trading accounts will be allowed to withdraw their assets, even after the new rules come into force on Jan. 30, the FSC explained. But they will be banned from making new deposits through the accounts.

However, Kang noted a loophole. In the new system, foreigners and minors can’t possibly make investments as it operates on a bank’s real-name account, but they could potentially use corporate accounts to make additional investments. “There’s no limit to that for now. We haven’t come up with measures to ban that as there is no actual way to do so,” he said.

Real Name Verification

Meanwhile, all cryptocurrency investors need to establish an account under their legal name at one of six banks rather than anonymous cryptocurrency accounts to trade on a domestic cryptocurrency exchange. The so-called real-name system is part of efforts to establish measures similar to the Know Your Customer (KYC) verification system in the U.S. The Korea Blockchain Association’s member exchanges had already self-imposed an ID verification system for users who create new accounts as of Jan. 1, but
this will be replaced
by the government’s regulation.

On Jan. 30, six banks will launch an ID verification system for adult citizens to create new cryptocurrency accounts, while all existing cryptocurrency accounts at exchanges will be banned from trading, according to FSC vice chairman Kim Yong-beom.

The cryptocurrency exchanges are falling in line. Major exchange Korbit said it will
close its virtual accounts this month, and users can trade with real-name accounts hosted by its partner Shinhan Bank. Korea’s biggest exchange Upbit, partly owned by internet giant Kakao, has partnered with the Industrial Bank of Korea. Coinone, which is joining up with NH Bank, told its users it would soon post instructions for how foreigners can continue trading on the exchange.

Weak Controls

The regulations come after the FSC found that cryptocurrency companies have been exercising loopholes. Results of an investigation, also announced Tuesday, found that some companies handling cryptocurrency had been registered as “shopping malls,” but subject banks did not have customer verification procedures or internal systems to recognize this, the FSC said.

Also, funds deposited into cryptocurrency-handling companies have been deposited to accounts of the company’s major shareholders or its employees, and there have also been cases of deposits to cryptocurrency handling companies from corporate names.

These transactions are irregular managements of funds, the FSC said, as they can be identified as suspicious transactions because banks have not practiced faithful reporting of suspicious transactions.